Tonnage tax fails to net FDI in shipping

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New Delhi, Jun 17: After India introduced the tonnage tax regime which cut the tax incidence on investors in the shipping sector in 2004-05, the tonnage strength of India’s fleet rose sharply in comparison to the measly 7% growth recorded between 1992 and 2003. But in the last couple of years, no investments have come into the shipping sector despite the fact that the government has allowed 100% foreign direct investment (FDI).

“The fact is that the initial impact (of the tonnage tax regime) has tended to peter out and there have been no investments from foreign investors. This indicates that more needs to be done on the tax front,” a senior government official said.

The shipping industry believes that the key reason investors are not evincing interest in the sector is the way direct and indirect taxes have evolved since the introduction of the tonnage tax system. For instance, the number of services covered by service tax has gone up from 76 to 107, taking the effective service tax rate for the shipping business from 8% to 12.36%.

Now, after a high-level meeting on taxation issues in shipping attended by the ministries of finance and shipping as well as top Planning Commission officials, the Centre has decided to take a fresh look at the taxes affecting shipping, in the hope to revive investments. The meeting was held to follow up the recommendations made by the high level group on services sector, which had also pointed to taxation issues leading to the sector underperforming.

The finance ministry is expected to revisit several taxation issues including simplification of service tax, MAT on profit on sale of vessels, corporate income tax on interest, seafarers’ income tax—borne by employers, withholding tax on charter hire charges and withholding tax on interest on ECB.

It is also likely to take a re-look at the issue of benefits under tonnage tax being rendered ineffective by the increase in service tax, dividend distribution tax (DDT) and minimum alternate tax (MAT). The dividend distribution tax has gone up from 13.07% in 2004 to 17% in December 2007. The minimum alternate tax (MAT) rate has also increased from 7.84% to 11.33% in the same period. Moreover, the fringe benefit tax has also hit bottomlines.

While no fresh levies either at the national level or the state level will be applicable to the shipping industry, the government is mulling exemption for the domestic shipping industry from service tax either domestically or internationally to ensure a level-playing field in its international operations. Thiswill be in line with other maritime countries.

The meeting noted that the proposals for improving the competitiveness of Indian shipping was heavily reliant on tax concessions as is the fact that the governments compete for getting the registration of ships done in their jurisdictions and the tax advantages they offer is the main consideration influencing the decision of investors in new shipping tonnage. The other considerations for investors are the availability of cargo and of trained seafarers and India is quite favourably placed on both these aspects.

The Commission is of the view that in granting tax concessions to any particular sector, the government should be conservative and in the case of shipping only those proposals should be considered which improved the competitiveness of Indian ship-owners in comparison with foreign ship-owners.

According to the Indian National Shipowners’ Association (INSA), the major levies that impinge the most on Indian ship owners are service tax, MAT on profit on sale of vessels, corporate income tax on interest, seafarers’ income tax- borne by employers, withholding tax on charter hire charges and withholding tax on interest on ECB.

Ships with foreign flags compete for Indian cargo on equal terms with Indian flag vessels the latter’s competitiveness is strongly influenced by any differential in the fiscal regimes. Twenty nine countries accounting for more than 70% of the world tonnage, including the Flags of Convenience countries like Liberia, Cyprus , Malta and Netherlands give wide flexibility to the ship owners registered in those countries in their operations along with low taxation levels under the tonnage tax scheme.

India too introduced the tonnage tax system with effect from April 2004. It had a favourable effect and boosted the growth of Indian merchant fleet. Under the new regime ship owners could opt for the tonnage tax whereby income tax is levied on the basis of presumptive income of the net tonnage (NT) of each ship owned by the Indian ship owners determined according to a fixed scale. It has been estimated to have reduced the incidence of tax to a level of around 3%. But the industry feels that the benefits of tonnage tax have been erodedby certain taxes like service tax and dividend distribution tax, which were introduced or the rates of which were enhanced subsequently. The meeting also considered the high level groups recommendations which included that income such as interest income earned by tonnage tax companies should be covered under the tonnage tax regime. Income from incidental activities qualifying under the tonnage tax regime should be suitably enhanced from the existing 0.25% to 1.00 % of the turn over from core activities.

Surplus resulting from sale of vessels should be covered within the scope of tonnage tax regime.

Indian shipping companies should be exempted from payment of dividend distribution tax on dividend declared/distributed to the shareholders. Indian shipping companies should not be subject to fringe benefit tax (FBT) on their major component of expenditure such as travel expenses, boarding and lodging expenses etc incurred for official purposes to ensure their competitiveness.

The ship supplies/spares provided to foreign going Indian ships should be zero rated. Customs duty should not be applicable on import of stores, spares and bunkers on the supplies for use in the international sea-going vessels.

The 5% customs duty on import of tugs and pusher crafts, dredgers and floating docks/ cranes/production platforms be removed.

Service Tax The shipping companies have to pay service tax at the rate of 12.36% on various services rendered to them such as cargo handling, clearing and forwarding, general insurance, clearing and forwarding agent service, port services, repair and maintenance, steamer agents, storage and warehousing, survey, manpower recruitment and professional services. The nature of some of these services like cargo handling and clearing; and forwarding is such that their suppliers have to be local and at the Indian end both Indian owned and foreign ships pay the same service tax.

At the foreign end no service tax is levied on foreign ship owners as shipping services are either exempt or zero- rated worldwide.

Indian shipping companies in terms of normal conditions of business, are obligated to obtain and consume outside India services (input services) like port services, repairs, dry-docking, cargo handling (loading/unloading), steamer agents services to name a few. But they have to pay service tax in India even on services provided from outside and received outside India unless they have been specifically exempted.

A Finance ministry notification of April 2006 gives partial exemption from service tax and the services availed outside India in relation only to a limited list including maintenance and repair, port charges, and cargo handling. However, these rules impose service tax on services received in India from overseas such as P&I insurance, brokerage/commission, banking and other financial services, manpower recruitment and ship management services. Foreign ship owners would normally be inclined to obtain the services in the latter group from foreign service suppliers and pay no service tax as these taxes are either exempt or zero rated. On the other hand the Indian ship owners would have to pay service tax on all these services supplied by foreign and domestic service suppliers.

Minimum alternate tax (MAT) on profit on sale of vessels. In India profit on sale of vessels is not covered under the tonnage tax regime. The company availing of the tonnage tax regime has to pay MAT at the rate of 11.22 % on the book profits in case the tax payable on income (other than tonnage income) is less than 10% of the book profits. The profit on sale of vessels gets credited to the profit and loss account and is included in the book profits of the qualifying shipping company on which MAT is applicable.

In the UK , Singapore, Ireland, Netherlands, Germany, Spain and Belgium the profit on sale of vessels is covered within the scope of tonnage tax regime.